21 December 2009

The Great Recession has discredited the once-irreproachable efficient-markets hypothesis (EMH). It turns out after all that markets do not present all available information, that investors and consumers are not always rational agents, and that prices fluctuate with alarming frequency and wide variation. In the ‘Issues 2010’ special edition of Newsweek, Barrett Sheridan ('Markets are like people') reports on a proposed alternative to the EMH; the adaptive-markets hypothesis (AMH). This idea’s foremost proponent is MIT economist Andrew Lo, who has set out to repair the now-obvious flaws of the EMH using the findings of behavioural economics. More specifically, Lo wants to introduce Adam Smith to Charles Darwin.